Average True Range (ATR) stop loss method is more popular among the experienced traders. In some countries like India it is also known as Day Moving Average (DMA).
Please note that MA (Moving Averages are different than ATR or DMA). Simply put, Moving Averages are calculated on the closing price of a stock on daily basis. It can go from last 5 trading days up to 200 trading days. Moving Averages are mostly used by stock traders who buy stocks for the short or medium term, not Intraday or day traders.
How Is the ATR / DMA Calculated?
The percentage of the difference between the highest point and the lowest point of daily moving averages of last few days is taken into account.
Day traders usually take last 5 days Average True Range, ATR or Day Moving Average, DMA. Some take last 14 days moving averages. Positional traders usually take last 30 days ATR or DMA.
Let us take the last 5 days ATR (Average True Range) of Nifty 50. As on today, the last 5 trading days are 29, 30 Dec 2016, 2, 3 and 4 Jan 2017:
Here is the image of daily high and low of the last 5 days taken from the NSE site:
Calculating the Day Moving:
90.30 + 82.25 + 78.20 + 70.50 + 37.60 = 358.85 / 5 = 71.77
71.77 is 0.87% of 8256.00 the current spot Nifty price.
Therefore if a day trader has bought Nifty Future to trade Intraday when Nifty spot is at 8256.00 his Stop loss will be at 8256-72 = 8184.00, and sell target, profit will be at 8256+72 = 8328.00. If at the end of the day the trade is in small profit or loss the day trader will exit as the trade was initiated for Intraday day trading and not positional trade.
The three types of stop loss methods of Intraday or Day Trading:
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